Junk Bonds in 2013: In Like A Lion, Out Like A Bear?

By Michael Aneiro

This blog has spent an eternity chronicling the improbable, ongoing run of the junk-bond market and trying, along with everyone else, to pinpoint when it might end, given that previous historical yardsticks are no longer of any use. The average junk bond price broke through the 105-cent barrier for the first time ever on Friday to 105.01 cents on the dollar, eclipsing the 8-year-old record of 104.99 cents, while the average yield, which earlier last week had dropped below 6% for the first time in history, set a fresh new low of 5.89%.

Today’s Wall Street Journal offers a story exploring how junk bonds are looking a pretty overvalued these days, starting 2013 with a heady first week even after gaining 15.58% in 2012. Matt Wirz and Patrick McGee report:

“It’s probably the tail-end of this run,” said Kathy Jones, a fixed-income strategist at retail broker Charles Schwab Corp. (SCHW).

That is creating a dilemma for many fund managers. Most say they still want to own junk bonds, in large part because they yield some five percentage points more than U.S. Treasury bonds. As well, companies will likely benefit as the economy improves, they argue.

But with so few bargains left, many fund managers are rethinking what and when they buy…. Ms. Jones is also recommending investors move out of the most risky of high-yield debt into bonds that are more highly rated.

Others are looking further off the beaten path for bargains in debt of smaller companies that are less-often traded but often have high yields.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.